Thursday, 23 May 2013

Progressive Capitalism - a few thoughts

Lord Sainsbury has a new book out, called Progressive Capitalism, which aims to sketch out "a new Progressive political economy." Being the nerdy type I am, I was immediately interested in what he may have to say about corporate governance and ownership, so I bought a copy. 

I should stress I've only read the intro - which calls for a move beyond neoliberalism, but (as you would expect) not back to public ownership or anything like that - and then skipped straight to the section dealing with equity markets and corp gov. What I was looking for here was some indication of thinking about reform at the Labour supporting end of the business community.

So what does he say? Well, he shares a lot of common ground with the Kay Review, arguing that financial markets don't really serve savers or companies and often work more to the benefit of intermediaries. He argues that shareholders are insufficiently engaged with companies, with too much emphasis on trading. He also says that UK's corporate governance regime is more focused on avoidance of value destruction, rather than long-term value creation. Two symptoms he identifies as arising from the corp gov regime are the structure and scale of exec pay (he says it's now financial market style pay) and the financial bubble.

He's also scathing about the way that company/management underperformance is often dealt with, through the market for corporate control. He says: "Some poorly performing managers have been removed, many by takeovers, a tactic much approved of by investment bankers because of the huge fees involved, but not a good way of handling the problem."

No much to argue with there...

But the important bit is the proposed remedies. He argues that a Shareholder Advisory Board should be created, to advise shareholders (I think he means asset owners here) how to contract and deal with asset managers. This would be with the objective of putting a more long-term, value-creating focus into the system. It's not immediately clear who would sit on this board but, unfortunately, it sounds like he thinks the investor trade bodies would be able to nominate them. This is one thing Kay is very clear should NOT happen, and I think the experience of the ISC/IIC should make Labour very wary of this approach.

He's also a fan of the Swedish model whereby shareholders are represented on nomination committees. He says that the Shareholder Advisory Board could facilitate and promote the develop of nom comms like this. He argues that this could work so that you have an external nom comm, with shareholder reps, that proposes NEDs, and even the chair, and an internal nom comm of the board that deals with exec appointments. The external nom comm could also facilitate shareholder engagement with the company over strategy. As an aside, I have seen the Swedish example crop up in a few places now, so this might be one policy to keep an eye on.

On takeovers, he clearly wants to gum the wheels up a bit. He argues for both a higher threshold to be required for deals to be voted through, and for a qualifying period to be introduced for shareholders in the target company to be able to vote on the deal. Notably he talks about people holding the shares for "a certain number of years". This goes further than the Cox Review, and funnily enough is pretty much what the unions were arguing for post Kraft/Cadbury (tho they also wanted a public interest test), but it doesn't go any further than Labour's 2010 manifesto, or indeed the ideas that Lord Mandelson was knocking about at the fag end of the last parliament.

And that's kind of indicative of the corp gov section as a whole, I don't really see much new here. A bit more strengthening of shareholder engagement, a bit less liberal on the takeover regime. Not much to argue with, but it doesn't take us further forward. Which is fine if you think the system works OK pretty much as it is, but it's difficult to reconcile with the stated objective of a new political economy. The corporate governance proposals are, for good or ill, minor tilts within the existing framework. There's nothing bad here, but there isn't much real change either. Even on this turf, you can find more radical proposals coming from within the financial sector itself.

Probably the most disappointing bit is the failure (as far as I can see) to talk at all about what role employees might play in governance in the UK, particularly given that a) the German model is discussed b) the author accepts that shareholders have failed to rein in exec pay and c) Labour is already committed to employee representation on rem comms. I know the issue of employee voice is hardly popular with the business community, but if 'responsible capitalism' and 'an economy that works for the many not the few' are to mean anything, policy proposals cannot be restricted to what the business community thinks would be beneficial to it. I personally think we could develop proposals that both tackle the problems identified by Sainsbury (and Kay and Myners before him) and emphasise long-termism, and nod towards greater stakeholder accountability. For what it's worth I think some companies really do get this too.

I personally think we can go quite a bit further.

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